Regulatory capital requirements for fixed-income trading may lead to a long-awaited boost in electronic venues that bypass banks, following the model for the equities trading industry, a report has said.

Greenwich Associates, a consultant, said in a report yesterday that there is set to be an “equitisation” in the fixed-income sector, meaning that more trading is set to be carried out on new dedicated electronic platforms.

The consultant said: "New capital rules and other changes to the basic structure of global fixed-income markets might succeed in achieving a transformation that has been discussed — but never realised — since at least the 1990s: the ‘equitisation’ of fixed income."

The “equitisation” of the market refers to the large amounts of automated trading carried out on equities exchanges, including a plethora of new alternative venues that have been launched in recent years to compete with traditional bourses.

At present, according to research from Greenwich, 77% of US institutional investors trade equities electronically, which compares to just 56% in fixed-income markets.

The Greenwich Associates report said that the stage has been “set for a far-reaching transformation” in the fixed-income world due to changes in the markets, “in particular, strict new capital reserve requirements imposed on banks”.

New regulations have also increased the amount of capital reserves banks and dealers have to hold in order to trade fixed-income products. Over the counter derivatives will be hardest hit by the new regulations.

The report said: “The resulting pullback on the part of dealers has already had a negative impact on market liquidity, and could reduce liquidity to the point at which the types of electronic trading venues typical in equity markets become viable alternatives for investors.”

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This is all bad news for fixed-income dealers, according to Greenwich, leading to thinner margins, more competition, and more investment in electronic bond trading platforms.

Fixed-income trading has already been in decline this year, with even the most successful investment banks reporting declines in revenues at their fixed-income, commodities and currency businesses.

According to a report from Berenberg Bank last month, FICC trading accounts for 50% of investment banking revenues, half of which comes from OTC derivatives trading.

Rivals to the traditional fixed-income trading model, where investment banks and dealers act as middle men on bond trades, have been increasing in number.

Last month BlackRock, the world’s largest money manager, tested its new bond-trading platform, Aladdin. Vega-chi, a European trading platform for convertible and high-yield debt, also has launched a service for trading US junk bonds.

The major banks have also been changing the way they transact fixed-income trades for their clients. Last year, Morgan Stanley launched its Morgan Stanley Bond Pool network, which aims to automate trades and lower transaction costs.

Tim Sangston, Greenwich Associates consultant, said: “Prior to the global crisis, investors were accustomed to having their trades cleared in full by individual dealers that maintained huge inventories.

“After the sell-side retrenchment caused by the crisis, we saw much more dealer-driven crossing, both on an internal basis among clients and in terms of dealers teaming up to process individual client trades. The next logical step is crossing between and among investors.”